Greek worries still hover and "risk" currencies stay weak. Locally, RBA minutes will be today's interest.

By Mike Burrowes and Kymberly Martin

The NZD and AUD were the worst performing currencies against the USD over the past 24 hours. Lingering concerns about the Greek debt crisis saw more risk sensitive currencies underperform, while the EUR managed to eke out a small gain against the USD.

The NZD has drifted lower on the crosses during the evening but has reversed some of these losses early this morning. NZD/EUR has fallen steadily from around 0.5680 to 0.5650 currently. Similarly NZD/GBP has drifted lower from 0.5020 to 0.5000 currently. NZD/USD is currently trading around 0.8090.

While not generating much reaction in the NZD, yesterday’s manufacturing survey showed activity lifted an encouraging 2.9% for Q1. The service sector also continued to expand during May, although at a slow pace, according to the BNZ – Business NZ Performance of Services Index (PSI). As a result, we have bumped up our Q1 GDP estimate to 0.4%.

The only NZ data release for today is net immigration but expect little reaction in the currency. The major focus will be on the RBA Board Minutes (from the 7 June meeting). We expect the minutes will reflect last week’s hawkish commentary from Governor Stevens. However the OIS market currently has no interest rate hikes prices in over the next 12 months.

For the day ahead, we expect NZD/USD to trade in a range of 0.8040 to 0.8140.

Majors

It has been a bumpy ride in FX markets overnight. The USD index rallied around 0.70% during the evening but has fully reversed those gains in the early hours of this morning. The risk-on or risk-off theme played out more clearly in FX markets overnight, while performance in equity and commodity markets was more mixed.  

The EUR/USD is only slightly higher over the past 24 hours, but trading has remained volatile. The EUR started yesterday on the back-foot after comments from the Eurozone finance ministers, noting that Greece had to approve tougher austerity measures before final decision is made on a further €12b in loans.

However a string of positive headlines has seen the EUR/USD more than recover its losses early this morning. Initially the Greek opposition announced it will agree on cost cutting and asset sales. The austerity measures should be ratified by the Greek parliament tomorrow night. Following this, EU’s Juncker hit the wires saying they have agreed details on the structure of the European Stability Mechanism. EFSF’s Regling joined the party, saying their guarantees will be raised from €440bn to €780bn. This was enough to send EUR/USD up from 1.4220 to just above 1.4300 currently.

The GBP/USD eked out gains over the past 24 hours, with sentiment been lifted by the move higher in the EUR. The next major event for the GBP is the MPC minutes (from their June meeting) on Wednesday. The voting will most likely be 7-2 in favour of unchanged policy, though it will be interesting to see whether new member Broadbent joins the hawks from the start.

While the EUR recovered, global risk appetite remains patchy. The Euro Stoxx 50 ended down 0.80%, while the S&P500 is currently up 0.50%. In this backdrop, risk sensitive currencies have struggled over the past 24 hours. In particular the AUD/USD and NZD/USD are down around 0.40%.

Looking to the night ahead, expect headlines from various leaders on the Greek debt crisis to take centre stage. Aside from this, we have the Eurozone and German ZEW survey. In the US, May Existing Homes Sales are due to be released.

Fixed Interest Markets

It was a quiet day in NZ swap markets yesterday. Bond yields rose along the curve with 10-year yields creeping back over 5.0%.

There appears to be some consolidation in swap markets after the recent rally. Yields stayed relatively unchanged along the curve with 2s-10s spread remaining around 172bps. The bond market had a slightly more active day with yields rising by 3-4bps along the curve. The yields on 21s that started the week making 27month lows, have crept back above 5.0%.

US 10-year yields clawed their way back from 2.94% to 2.96% overnight with German bunds also rising from 2.91% to 2.96% as risk appetite stabilised. Greek yields and CDS spreads remain close to highs. With no firm resolution yet in sight, the Greek government vote of confidence on Tuesday evening (Greek time) will be a critical development in this drawn out crisis that is affecting markets globally.

The uncertainty from the European debt crisis has seen the Australian market remove expectations for future RBA rate increases. This comes despite RBA Governor Steven’s recent comments that further rates increases are likely to be necessary. OIS markets are now pricing a small chance of a rate cut from the RBA over the next 12mths. Australian swap yields have fallen, with 3-year swaps yields falling below March lows to around 5.05%, the lowest level this year. Consequently, NZ-AU 3-year swap spreads have become slightly less negative at -1.34% having been at -1.40% a week ago.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.